Pessimism Notwithstanding, Growth Picks Up

Growth was robust and stable throughout 2017, even as fixed asset investment and consumption kept weakening. Exports rose, after two years of decline. Producer prices were elevated, while CPI showed little volatility. Monetary policy returned to moderately neutral levels, from its previous tight condition, and the money supply plunged.

GDP was up 6.9% for the year, and up 0.2 pps from 2016. Growth was consistent in quarterly terms, at 6.9% y/y in Q1 and Q2, and 6.8% y/y in Q3 and Q4. Value added for primary industry rose 3.9% in 2017, up 0.2 pps from 2016; manufacturing industry was up 6.1% y/y, flat on 2016; and services rose 8% y/y, up 0.2 pps. Industrial output rose 6.6% y/y, up 0.6 pps, though growth has been slowing. Fixed asset investment was up 7.2%, down 0.9 pps from 2016. After removing the price factor, investment was up 1.3% y/y, down 7.4 pps from 2016. Real estate sales turned from heating to cooling, the 19.5% y/y rise in Q1 falling to just 2.5% y/y by Q4, adding another factor in investment drop. Exports, conversely, picked up, rising 7.9% y/y, up 15.6 pps from 2016. Producer prices continued last year’s appreciation trend. The ex-factory price of industrial goods rose 6.3% y/y, and PPI rose 8.1% y/y. CPI rose 1.6% y/y, down 0.4 pps from 2016. The main financial indicators experienced major decreases. By the end of 2017, M2 rose 8.2% y/y, down 3.1 pps from 2016; M1 rose 11.8% y/y, down 9.6 pps from 2016.

This year begins with intensive financial regulations. On January 5th and 6th, China’s Bank Regulatory Commission issued three documents aimed at strengthening commercial bank regulation, related to trusted loans, bank equity and the too–big-to-fail mentality. These rules are responses to the central government’s main goal, set at the end of 2017 for 2018, to contain financial risks. On December 20th, the central government listed alleviating financial risk as one of the top three tasks facing central government. This again is a continuation of the central committee meeting about financial risk in mid-2017, led by President Xi Jinping.

We view the potential financial risks in China as containable, as the regulators have recognized the problems, and are determined to take serious steps to deal with them. Shadow banking as part of financial liberalization requires prudential regulation. The Chinese government has the capability, and the advantage of designing regulation by absorbing the lessons of U.S. 2008 subprime mortgage crisis.